Investing in MFs is different from Financial Planning

Written by Vidya Kumar

April 26, 2017

Picture

Executive Summary: Many people make the mistake of considering financial planning and investing in MFs as one and the same. Financial Planning is a comprehensive plan on how to manage your finances and build your wealth. Mutual funds are instruments to help achieve this objective.

Many people come to us to invest in mutual funds and think that they have done financial planning. Others want to do financial planning but want to only invest in mutual funds. But this is not right. Many people are aware of mutual funds now thanks to the aggressive marketing and educational material by the MF houses. But Investing in Mutual Funds and Financial Planning are as different as chalk and cheese.
1) Mutual Fund Schemes have an investment objective and invest in certain market instruments to reach that objective and provide gains to people who have invested in the scheme.
Financial Planning is a more comprehensive process. We have to plan our finances to create a roadmap for finances throughout our lifetime.

2) Investing in mutual funds gives you the chance to earn returns and appreciate your wealth. Financial Planning includes many things like –

  • Assessment of current income and wealth status
  • Creation of Budget
  • Listing of money goals,
  • Plan on how to achieve the goals
  • Insurance
  • Tax Planning
  • Estate Planning
3) Financial planning will include plans for emergency corpus, reduction of debt etc. Mutual Funds is a way to achieve goals. For example, you can invest in blue chip Mutual Funds and sell them at the right time and use the money as emergency corpus.

4) In financial planning, the entire portfolio will have to be looked in its entirety. Asset allocation and portfolio balance has to be done taking all assets into consideration including the types of Mutual Funds invested in. Mutual Funds are a subset of the broader portfolio which can include, Gold, Bonds, Stocks, Real Estate and Mutual Funds.

5) Financial Planning takes care of the financial health of the person. Mutual Funds are a part of the financial portfolio wherein it has to be decided as to how much money should be invested in MFs. This decision has to be taken after considering other assets and liabilities and current financial situation and financial profile. For example, if you have recently joined the workforce and have a well paying job in an MNC, you can invest in equity mutual funds. If you are a retired person, your allocation to debt Mutual Funds should be more. Mutual Funds are a part of the bigger financial portfolio and you can invest in different types of funds like Equity funds, Balanced Funds, Liquid funds etc.

6) Financial planning should be done professionally. If you do not have know-how, time or confidence in your skills, you should outsource it to a financial planner. You may end up investing in poor products or unsuitable products if you are not knowledgeable. You might make losses. Mutual Funds are strictly regulated by SEBI. They are transparent in reporting and have to follow strict rules on compliance. The fund manager will also have the responsibility for tweaking the profile to minimize losses. It is not the same with all assets of your financial portfolio. For example, if you invest in gold or real estate, the prices can move either ways.

An appropriate financial plan will steer the investor in investing in the right mutual funds so that the overall portfolio remains in balance and returns are optimum. Mutual Funds play a part in the financial plan which help the person achieve his/her financial objectives.

0 Comments

INSIGHTS + MONEY STORIES

INSIGHTS + MONEY STORIES

Our Newsletter features money stories and useful insights on personal finance that can help you make informed decisions and stay up-to-date with the latest trends in personal finance. Sign up today!!!

You have Successfully Subscribed!